ANALYSIS:THE INDEPENDENT stress test results published yesterday evening and the fresh budgetary measures unveiled on Thursday are likely to precipitate Spain's move towards applying for a full sovereign bailout and prepare the ground for conditions to allow the European Central Bank to buy Spanish bonds.
Beset by high unemployment, a deepening recession, debt-laden regional governments and struggling lenders, the stress test results were Madrid’s latest attempt to convince international markets and the big euro zone countries that it has a handle on its banking crisis.
The €59.3 billion shortfall was estimated by independent consultants Oliver Wyman, which has helped Bank of Ireland and Permanent tsb work through their problems in recent times and famously named Anglo Irish Bank the “best bank in the world” at the tail-end of the decade-long property boom.
The Spanish bill falls within the €51 billion to €62 billion range estimated in an assessment of the banks in June, when the Madrid government sought a bailout of up to €100 billion for the country’s banks. Nationalised savings banks account for €49 billion of the €59.3 billion total.
They include Bankia, the country’s worst bank, which needs €25 billion – €6 billion more than previously estimated by the bank itself, whose capital call led Spain to seek the €100 billion banking bailout. The other nationalised banks comprise Catalunya Caixa which requires €10.8 billion, NovaGallicia, €7.2 billion, and Banco de Valencia, €3.5 billion.
The worst-case scenario tested on the banks was for a peak-to-trough fall of 37 per cent in house prices; a 72 per cent decline in land prices by 2014; further economic contraction of 7 per cent from 2012 to 2014 and unemployment rising from 25 per cent this year to 27 per cent in 2014.
Owen Callan, analyst at Danske Markets, said the €59.3 billion sum was a “Goldilocks figure – it is neither too high to scare the markets, but not too low to be seen as unrealistically optimistic”.
Although the Spanish government has said not all the cash may come from the state, banking sources stressed the savings banks would struggle to raise money from private sources.
International Monetary Fund managing director Christine Lagarde, the European Commission and Eurogroup president Jean-Claude Juncker pointed to the need for Spain to draw down the funds as quickly as possible.
Yet this week’s statement from the German, Finnish and Dutch ministers which said that past bad bank debt should rest with national governments raised questions on how quickly the money can be drawn down from the euro bailout funds.
Jose Ignacio Goirigolzarri, executive chairman of Bankia, told The Irish Times this week he did not believe there was just “one shot” to generate international credibility for Spain’s ability to repair its banking system, but that it would be built up over time.
“It will be hard to convince the markets that the stress tests set the right level of capital required because market expectations are more conservative – you cannot rule out a lot of the domestic banks having to raise additional capital,” said Daragh Quinn, analyst at Nomura in Madrid.
All eyes will be the reaction of investors – and Spain’s borrowing costs – when the European markets open on Monday.
